When VAT on oil is “crooked road” #noynoying

Let us please get real! The repeal of the Oil Deregulation Law will not cure our oil price woes. It will only throw us back to the bad old days when government required documents before approving every price increase proposal. Still, the oil prices increased—the only difference was that it took some time to take effect, simply because the government had first to evaluate the oil companies’ price-hike claims. In other words, it is not as much a regulated or a deregulated oil industry atmosphere as the relative volatility of the global prices of oil that causes our oil price woes today.

Methinks a comparatively more practical recourse would be to repeal the value-added tax law. Indeed, for every centavo increase in the local price of oil, the public unduly suffers, yet the government virtually rejoices because of the extra one-twelfth of a centavo automatically added to its coffers. Alas, there can’t be anything more ironic, or a road of governance more crooked, than that!

One recalls that when the VAT law was introduced, several basic consumer products and services were VAT-exempt, including food, medicine and petroleum. Truth is, government finds in the VAT system the perfect and easy solution to its tax collection inefficiencies. But here’s the rub: Its tax collection deficits continue to grow from year to year, so much so that medicine and petroleum have been delisted from VAT exemption. Worse, the tax rate which began at 10 percent is now 12 percent—in fact, the highest in the region. Alas, when can government learn to moderate its tax greed, which nonetheless has failed to eliminate its yearly tax collection shortfalls?

UP economics professor and former Budget Secretary Benjamin Diokno recommends a lowering of the VAT rate on oil from 12 percent to 10 percent. With due respect, I don’t think that’s enough! It would be probably fine if applied to all products, but definitely not with respect to petroleum products alone, which should rather be totally VAT-exempt. For two commonsensical reasons: First, petroleum products were originally (under the old tax code) exempt from VAT, and precisely because they were then already subject to excise tax. They still are today—a clear case of double taxation. Second, let us eliminate the tax collection bonanza that government automatically gets, while the public suffers, whenever oil prices go up. I must submit this is generally true for all commodities subject to VAT. But then, I seriously doubt that there is any article of commerce in our midst and times whose price behaves as wildly, uncontrollably and frequently as petroleum products do.

A zero-VAT on oil is, of course, going to be a big drain on the government’s revenues, given the volume of oil business this country has. But sheer business volumes are irrelevant here. Aren’t there, all told, more agricultural, marine, livestock and forest products in the market? And they are all VAT-exempt! Well, there are many ways to skin a cat. It is high time government learned to manage its finances more sensitively and less irresponsibly.

Let’s see. If we cut the VAT on petroleum products the price will be lower by 12%. If we do as Diokno suggests and cut the Vat from 12 to 10 percent then the price will be lower by 2%. Meaning to say that if pump prices are reduced anywhere from 2 to 12 percent from the current price okay na ang lahat? What is the ideal benchmark?

Now, if we use the current price less less 2 -12 percent as the benchmark, then what happens if the pump prices skyrocket to 15 percent or more? Saan dudukutin ni Diokno ang discount kung sagad na sa 12% at wala pa din relief? Will he then call for oil price controls, the junking of the oil deregulation law, and bringing back the oil price stabilization fund as Bayan and Gloria’s minions have proposed?

Oil price, as the 2008 oil price shock demonstrated, is not determined by supply and demand alone. In 2008, demand was low because of the worldwide financial crisis and yet the price of oil skyrocketed from below $60 to over $130. And then within weeks of hitting its peak, oil prices dived to less than $50 without any palpable change in the demand/supply equation. Why?

Because by 2008, oil price speculators outnumbered oil suppliers and users. Speculators were fueled by banks who cannot make money from low interest rates so they go into commodities trading. Look at the size of paper trades by Vitol, Goldman Sachs and their ilk.

So isn’t it obvious how puny, ineffective, and misplaced addressing the oil price problem is if you attack it from a local VAT or price control approach? And you will bankrupt yourself at the end of the day because the price of petroleum products is beyond anyone’s control. Well, anyone who is not a big time oil commodity trader.

The solution therefore lies somewhere else. Unfortunately, I don’t know where to look. Neither does Diokno nor all those other geniuses who specialize in nguynguying.